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Xoma Plunges on Diabetes Drug Flop

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CEO Engle tries to put best face on study failure but stock loses almost a third of its value.

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The theme of Xoma's (XOMA) 2007 annual report was "potential."

The year marked Steven B. Engle's first as CEO. Engle's letter to shareholders focused on treating diabetes with an experimental drug called XOMA 052, the company's lead product.

"XOMA 052 has the potential to address major unmet medical needs in diabetes and other indications," Engle said in his letter. The drug would also be studied to treat rheumatoid arthritis and other inflammatory conditions, he added.

Now, Engle says Xoma's drug failed to meet goals for reducing blood sugar levels in diabetics in a company study. The drug worked no better than a placebo. Shares of the company lost almost a third of their value, dropping to $3.60 in midday trading Wednesday.

On a call with investors and analysts last night, Engle tried to put the best face on the news. The drug didn't hit its target but it did reduce a human protein associated with heart attack and stroke. The drug, he said, may have the potential to treat patients at risk for those type of events.

"We believe we have the elements of a novel and a very exciting new approach to evaluate for both diabetes and cardiovascular disease," Engle said on the call.

Xoma is not a new kid on the block. Founded in 1980, the company went public in 1986. The stock traded above $400 a share in 1987.

On paper, the company looks attractive. It has partnerships with major pharmaceutical companies, including Merck (MRK), Novartis (NVS), and Takeda Pharmaceuticals of Japan. It helped develop Roche's drugs Lucentis for an eye disorder Raptiva for psoriasis (the latter was pulled from the market for safety concerns). Xoma has a biodefense business that gets millions of dollars through US government contracts. Xoma co-founder and chief medical officer Patrick J. Scannon sits on the National Biodefense Science Board.

Finally, Xoma has a development partner for its lead drug. French pharmaceutical maker Les Laboratories Servier partnered with Xoma in December. Servier paid Xoma $15 million in January and agreed to loan the company about $20 million to help develop XOMA 052.

Last year, contract revenue, licensing fees and royalties added up to $33.6 million for Xoma, compared with $98 million in 2009. While it eked out a $550,000 profit in 2009, the company lost almost $69 million last year.

As of the end of last year, the company had an accumulated deficit of more than $853 million, securities filings show. Needless to say, the stock trades at a fraction of its all-time high. It's dropped 57% in the past year and almost 90% in the past five years.

Even bulls on the stock say it may be some time before investors can believe in that Xoma potential again.

"A lack of visible near-term catalysts could keep Xoma shares in the penalty box for some time," RBC Capital Markets analyst Jason Kantor says.


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No positions in stocks mentioned.
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